A recent report from Moody’s Investors Service shows that the U.S. workers’ compensation sector has improved significantly since 2011 as the domestic economy and labor market have gradually recovered and insurers achieved cumulative rate increases.

However, competition is increasing and profitability, while good, is diminishing.

Further margin compression is likely over the next two years, according to the report, which noted that the WC sector’s fortunes are closely tied to the U.S. labor market, given the compulsory nature of the benefits the insurance provides. The falling national unemployment rate, 4.4% as of June 2017 from near 10% several years ago, is positive for the sector.

And if you were wondering about how much significance the WC sector has, Moody’s report notes that WC is the largest single commercial line for US P&C insurers, comprising nearly 19% of U.S. commercial lines premium volume and approximately 10% of the P&C industry’s total direct premiums written, behind only personal automobile and homeowners insurance.

Responding to questions posed by PropertyCasualty, Sid Ghosh, vice president and senior analyst for Moody’s, based in New York, said that “one general observation is that the claims frequency trend has been flat to slightly negative in WC for a long time even as the economy has added a significant number of jobs in the last couple of years”.

“With improvements in workplace safety, we expect frequency trend for our rated insurers to remain slightly negative, in line with their longer-term track record. In addition, with medical cost trends in the mid-single digit range, we expect overall loss cost trends to remain low unless there is an uptick in lawyer involvement or medical inflation.”

“Although we can’t comment on what a risk manager should or should not do with regard to maintaining and controlling costs, we can say that the role of a risk manager in an insurance organization is governed by its enterprise risk management (ERM) principles and guidelines”.

“Most well-diversified national WC writers adhere to strict risk controls standards set forth by their ERM standards and guidelines. The complexity of assessing risks would depend on an insurer’s exposure profile and geographic diversification.”